Mobile Telecommunications Company K.S.C.P. (ZAIN) Earnings Call Transcript & Summary

Good day, and welcome to the Goldman Sachs hosted Zain Group Full Year 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Faisal Al Azmeh. Please go ahead, sir.

Good afternoon, and good morning to everyone on the call. This is Faisal Al Azmeh from Goldman Sachs, and thank you for joining today's call where we will be hosting Zain Group's executive management team to discuss the 2022 full year financial results. I'll now hand over the call to Mr. Mohammad Abdal, the group's Chief Communication Officer, to introduce management. Thank you.

Thank you, Faisal, and welcome, everyone, to Zain's Full Year 2022 Earnings Conference Call. With me today is our Group CFO, Ossama Matta; and we have our Head of Finance, Mohammed Shereef; and Aram Dehyan, Investor Relations Director. And in a moment, we'll take you through the IR presentation, which has been posted earlier today on our website. And after that, we're happy to answer any questions you may have. During the call, we will be making forward-looking statements, which are predictions, projections or other statements about the future events. These statements are based on the current expectations and assumptions that are subject to risks and uncertainties. Please refer to our detailed cautionary statement found on Slide 2. With that, I will now turn the call over to Ossama Matta.

Thank you, Mohammad. Good afternoon, and thank you for joining us on this call today. We have published our full year '22 results, and I'm thrilled to announce to all stakeholders that we have not only achieved, but also exceeded our full year guidance. This has been a tremendous year for Zain, and I am proud of the hard work and commitment of our teams at the group as well as the operations, who overcame the many socioeconomic and competitive challenges faced during the year. I want to emphasize that this great performance is a testament to our clear vision and strong execution of our 4Sight strategy, which has been a driving force in our success and has allowed us to stay focused on our goals and objectives. Operationally, all Zain opcos performed well that were instrumental to the great success of 2022. Our continued focus on investing in 5G expansion, 4G network upgrade, and FTTH rollout, combined with cost optimization and data monetization initiatives and launch of the new digital services designed for all customer segments, whether it's individuals, enterprise, governments, et cetera, became significant drivers of growth across several key markets. Our data revenue witnessed a healthy growth of 5% for the year, to reach $2.2 billion, representing 40% of the consolidated revenues. Zain Group's digital revenue grew by 52%, including Dizlee, Zain Group API platform, which continues to grow exponentially, partnering with 25 global solution providers, offering 51 different digital innovations and having processed over 191 million payment transactions since its launch in 2018. Before we dive into the financials, it is worth mentioning several significant accomplishments and transactions that occurred recently. If we go to Page 5 on the presentation, the Board made 2 key recommendations. The first one, a cash dividend of 25 fils per share for the second half of 2022. By doing this, we will have a total of 35 fils per share for the year following the interim dividend that we have done first half by 10 fils per share. This reflects a 2 fils increase on the previous 3 years, and the total distribution for the year will be approximately $496 million, representing a 78% payout ratio. We believe such a ratio is one of the highest in the region. The second recommendation, the Board recommends a minimum of 35 fils per share for the forthcoming 3 years, split in interim and annual dividend. These 2 recommendations provide a clear indication of strong operational performance and the strength of our financial solvency as we grow the business. Including the total recommended cash dividend of 25 fils for the second half of 2022 and the 35 fils each year for the coming 3 years will total 130 fils in cash dividend. This expected distribution based on the current share price will reflect an average annual yield of approximately 8% for entitled shareholders for the 3-year period. Another thing that I would like to point out is Zain Sudan sale. After careful consideration, especially in light of the recent much improved performance in Sudan, Zain management decided not to proceed with the nonbinding offer for the sale of Sudan and Kuwaiti Sudanese Holding Company. And instead, we'll continue to explore and capitalize on various profitable opportunities within the country. We are very confident on the future outlook of Zain Sudan in driving shareholder value, which is backed up by the recent visits to Sudan of our Vice Chairman and Group CEO, Bader Al-Kharafi, who made a commitment of investing $800 million in Sudan over the coming 5 years. On the tower sales strategy, this is something that we are very proud of. In January, we successfully concluded tower deals in KSA and in Iraq totaling $1 billion in value. Zain KSA sold 8,069 towers for $807 million to the public investment fund, with a transfer of at least 3,000 towers completed in January 2023. And the remaining towers to be transferred over the next 18 months. As in the last call, I wish to restate that Zain KSA received cash of SAR 2.4 billion, which is approximately $645 million, and a 20% stake in the PIF tower company. That transaction will result in a gain of up to SAR 1.1 billion. Likewise, in 2023, then Iraq also entered into a 15-year agreement with TASC Towers, sell and leaseback of the towers, as well as for the management rights of the 4,968 towers portfolio for $180 million. With these 2 achievements, we have now completed tower deals in 4 of our markets. Similar tower company models are currently under review in Sudan, Bahrain and South Sudan. And we look forward to making announcements when they happen. As it stands, we have completed 2 of the tower deals with TASC Towers and plan to expand with TASC to other Zain markets given our strategic relationships. On the FinTech side, we are pleased to report that our FinTech offering in several key markets grew exponentially. In 2022, total revenue surged by an impressive 241% year-on-year and the customer base saw a significant increase of 64% to reach 1 million customers. Additionally, our total transaction value grew 56% to reach $3.6 billion. In Bahrain, we acquired a digital bank license from the Kingdom's Central Bank and expect commercial launch this year. While in Sudan, we are currently fulfilling the necessary regulatory requirements to be awarded a FinTech license. In Kuwait, we have applied for a digital bank license from the Central Bank and are awaiting update. We have very ambitious FinTech aspirations as stated by our CEO, basically being the first telco-led challenger bank in the region, and we'll continue to invest in and foster this area of the business. Some important regulatory updates that I would like to share with you. Regarding the Number Range litigation in Kuwait, on 20th of February 2023, the appellate court rejected the appeal by MOC and CITRA and affirmed the verdict by the court of first instance. The verdict of the first instance is in favor of Zain. As we mentioned on our last call, Zain Jordan also has signed a settlement agreement with the TRC, which includes settlement of revenue share, disputes, 10-year extension of 2G, 3G, 4G, and granting a 5G license for 25 years. All of this is totaled at KWD 85 million. We expect significant savings and potential future benefits from this agreement. On ZainTech, we recently completed ZainTech's acquisition of Bios Middle East that will greatly enhance our hybrid and multi-cloud managed service offerings and drive enterprise revenue growth. B2B revenues grew 28% year-on-year, reflects the sound and cohesive business model between ZainTech and our regional operations that are targeting the fast-growing and lucrative business area. Another thing to point out is the growth of Zain eSports, which soared during this year, as we held 28 tournaments in 2022, with over 30,000 gamers, more than 70 million social media impressions, and 15 million engagements on social channels. Regarding the awards and achievements that Zain received during the year. If we go to Page 6, Zain's brand valuation has grown significantly to $2.74 billion according to Brand Finance 2022 rankings that will be released by the end of this month. The impressive 14% growth in the brand valuation demonstrates the strength and impact of the Zain brand and the ever-changing telecom industry. Reaffirming this higher valuation in December 2022, Zain was named Best Telecom brand in MENA for 2022 by leading industry telecom Review magazine. Our commitment to sustainability, diversity and inclusion has been well documented and taken seriously by all management teams. We maintained A minus rating in the CDP score report Climate Change 2022, placing Zain first in the region and among global leaders. We've also recently committed to setting emissions target in line with the Science Based Targets initiative guidance to halve carbon emissions before 2030 and achieve Net Zero carbon emissions by 2050. We were awarded the Best Diversity and Inclusion Strategy and Best Women Development and Leadership Program by Informa at The Future Workplace Awards, beating out some leading regional entities. Moving to the financial highlights for the year, which is Page 15. We ended the period serving a total of 52.4 million customers, a 7% growth compared to last year. Our revenue for the year increased 14% to reach KWD 1.7 billion, which is $5.6 billion. Consolidated EBITDA for the year increased 7% to reach KWD 673 million, which is $2.2 billion, reflecting an EBITDA margin of 39%. Consolidated net income reached KWD 196 million, which is $640 million, up 6% year-on-year and reflecting earnings per share of 45 bps. CapEx, which is on Page 16. We invested $936 million, representing 17% of revenues. If we look at the CapEx presented here, you will see that the intangible portion of it is $275 million, while the tangible portion is $661 million. And this is mainly on the expansion of Fiber-to-the-Home, 4G upgrades, and network sites across markets, also ongoing 5G rollout in Kuwait, KSA, and Bahrain, as well as on the spectrum license fees. Debt profile, which is on Page 17 of the presentation. The group continues to maintain healthy cash flows with total dues to the bank of $4.5 billion, increasing 3% year-on-year, and net debt-to-EBITDA currently stands at 2.2x. Finance costs increased by 27% compared to the prior year. As we look ahead, we remain committed to executing our strategy and driving sustainable growth. We will continue to focus on our customers and delivering value to our shareholders. And with that, I will now hand over to Mohammad for Q&A session, and thanks, everyone.

Thanks, Ossama. We can move now to the Q&A session. And I'll ask you guys to limit yourselves to one question and follow-up. Operator, could you repeat the instructions for the Q&A, please?

[Operator Instructions] We do have your first caller in the queue. Nishit Lakhotia from SICO.

I actually have 2 questions, and I'll come back in the queue if there's more opportunity. The first one is on the data growth. Your data as a percentage of revenue has fallen from 42% to 40% this year because your overall revenue has grown by 13%, while data growth has been just 5%. So is there some challenges you're facing on data monetization that the overall data growth has slowed down compared to the other components? So any more clarity or granularity on this data side of business would be helpful. And second question is on the debt side. Given that there have been multiple tower deals that we are going to see the money coming in, in 2023. How is that going to reflect in your overall debt ratios going forward? And how much of your current debt is hedged or fixed? Any idea on that would be helpful.

On the data monetization, as a percentage, yes, it has increased in terms of revenues, but there is growth in data revenues compared to last year across all operations. Take into consideration the challenges, also the competition that we have in markets like Kuwait, Saudi and Jordan. This will lead definitely to more stabilization of prices in these markets, putting more promotions in these markets, and that will lead to a lesser percentage of revenues as compared to total revenues. But in general, monetization is doing fine. Here in Kuwait, for example, I can give you the latest update. We have introduced lately MAX product. MAX product is basically a combination, it's a quad play. We call it a quad play between content, minutes, data, as well as handsets. And we launched it towards the end of last year and this year it's doing exceptionally well. In Jordan, there is a huge push on the fiber as well. In Saudi, there is a great performance in terms of 5G, and we have talked about this during the past quarters. In Iraq, there is a good performance in terms of 4G services and data. But as I mentioned, in total, roaming revenues has increased. International revenues has increased compared to last year. Data revenues has increased compared to last year. If we look at data, how much it constitutes from the total revenue, you will see it dropping a little bit. But this is not an alarming situation. It is still very healthy. On the debt side, our debt is approximately hedged up, I believe, between 15% to 17%. We have run extensive exercises on the hedging, and we have looked based on the analysis being floating rather than fixing for us. And we can also prove this, it is better to keep floating rather than fixing the hedge. In all cases, now it is very difficult to talk about hedging, as it will be very expensive. But still from the leverage side, from the balance sheet side, we still have a very solid cash position and good leverage percentage.

Okay. Yes, just -- I didn't hear it correctly. You said 15 to 17 or 50 to 70 -- what's the hedge percentage?

1-5 to 1-7...

Okay.

[Operator Instructions] We move next to Madhvendra Singh from HSBC.

So a couple of short questions from my side. Looking at the -- so you have not given the operating performance of the opcos here, but just wondering if Sudan continued to have a good performance, because third quarter was very strong for Sudan. So wondering whether that is the reason why the group revenues have done so well. So that's the first question. And following up on the question which Nishit asked about the debt level. Finance costs have gone up during the period. So wondering, do you have like an absolute finance cost in mind which you will be comfortable with? And whether that means you probably need to pay down a bit more debt at the headquarter level. Is that something which you have in mind? Or you are okay with paying higher finance cost and overall leverage you're not going to touch?

Sudan continues to perform well, yes. In terms of revenues, the growth is coming from all of the operations. All the operations did very well compared to last year in terms of revenues. Sudan specifically increased by 48% in dollar terms, achieved $489 million in terms of revenues and EBITDA of $250 million. Sudan continues to do well. The services that we are providing in the market, the leadership position of Zain in the market, the price uplift that we are doing, and as I mentioned before, allowed in our license and approved by the regulator, this has helped us a lot in Sudan. We can see that there is a lot of also digital attempts in Sudan. We have seen digital revenue increased significantly in Sudan. And I believe when we introduced the FinTech play, this will be also complementary to the success of Zain Sudan. On the debt side, we continue to manage it very tight, very well. Now there are a couple of things happening this year. Tower sale in Zain KSA, which has happened already at the beginning of the year, receiving the cash also happened at the beginning of this year. This will be used partly to reduce the debt, and this will also reduce the total interest. What we have seen is unfortunate in terms of increase in interest rate. Our expectations for 2023, without taking into consideration the debt reduction, the total interest costs might increase by $100 million to $110 million. But with this, we're still going to see a good growth in terms of bottom line for 2023. Okay?

We'll hear next from Ziad Itani from Arqaam Capital.

Congratulations on the strong results. Just a couple of questions from our end. It seems that in Q4 towards year-end, you had a sizable goodwill impairment related to Iraq. Can you elaborate on this? What triggered this specifically? Any potential risks in the operational performance in that market? The second question, specifically, I don't know, Ossama, if you can comment on this, because it's a Board decision, but what is basically, I mean, the reason why the decision came to increase the dividend despite the rising interest rate environment. To be a bit more accurate, do you expect this to be financed from the free cash flow generation of the firm? Or is it because of the tower sales that the firm is now doing in Saudi and Iraq?

Thank you, Ziad. Regarding the impairment which is evident in the P&L, it is related, yes, of course, to Zain Iraq. We have been, from the time they devalued the currency in Zain Iraq, and we, as an operation, trying to increase the prices in Zain Iraq, which is not like Zain Sudan; the competition there, the socioeconomic conditions in the market, the irrational competition and the unfair competition from Korek in the market put a lot of pressure on the growth in terms of revenues and EBITDA. Despite all of this, we increased revenues in Iraq by 8% compared to last year full year. And EBITDA increased also by 4%. Nevertheless, when we look at the projections of Zain Iraq and we discount, based on the rate, including the debt rate, which has increased, this has led to a WACC of approximately 19% to 20%. And when we discount the future cash flows and we compare it with the carrying value of the investment in our books, this has led to an impairment for the goodwill in our books. Would this continue? We are seeing now 2 major positive things. One is they removed the sales tax in Iraq. And this has led to a positive impact on the revenues. Sales tax in Iraq was 20%. So this is out. This will increase -- the usage will increase -- utilization will increase revenues. And we have seen that towards, I think, December and January. And another thing, there was an appreciation of the Iraqi dinar versus the dollar, and this happened also lately. This also happened in January. This also has increased revenues as well as EBITDA as compared to prior year, as well as to the projections. So with these 2, we believe -- and the introduction of new products like oodi pushing more into content, pushing more into gaming, in Iraq, I believe, hopefully, we are out of the woods. This is for Iraq. And your other question, which I forgot, it is related to dividend. Yes, on the dividend side, it's a Board decision, which is about recommendation, basically, which we also support. With the current situation that's happening in the market, having a dividend yield of 6% to 7%, if you factor in the remaining or the future 35 fils committed by the Board to deliver, you are talking about, with the current share price, around 8%. I believe this is excellent for our shareholders, for our strategic shareholders as well, taking into consideration the cash position of the company, solid cash position. The plans that we are having also on the funds that we're going to receive, whether it's the Number Range in Kuwait, whether it's the towers in Saudi, we believe that giving an increase of dividend is something good for the shareholders and eventually also good for the company.

We'll go next to Nishit Lakhotia with SICO.

Yes. Just a couple of follow-up questions. One on Sudan. Last call, it was mentioned that $16 million of the dividends from the promised dividend upstream was paid. So have you received the remaining dividends that was expected last year to be upstream? And are you expecting more dividends possibility this year for upstream from Sudan? And the other question on Sudan is that you've committed $800 million over 5 years, which is like $160 million per year. And currently, your CapEx rate has been $50 million to $70 million. So this is quite an uptick on the CapEx. So I mean this versus the dividend, so if you can just share some light on this Sudan. And secondly, funds from the Number Range, you just mentioned. And so in case, finally, the court verdict and everything is settled, do you expect cash payment from the regulator and the government, or it will be set off against the future payment that you might have to do? How will that work?

On Sudan, yes, we received dividend from Sudan as promised by the regulator, also Central Bank. Everybody was supporting this, based on the visits that as a management we have done to Sudan. We received so far like $31 million of dividend for 2022, that we expect to receive in 2023. And this is based on the discussions that's going on with the regulator as well as the Central Bank. We expect to receive approximately $70 million. There was another question on Sudan, or this is it...

On the CapEx intensity, basically. Because it's quite a significant pickup from around...

Yes, yes. If you look at the plans that we have for Sudan, there is a detailed planned smart investment for Sudan. And accordingly, when you sum up these investments, it will be in the range of $800 million in the coming 5 years. We had taken into consideration that modernization of the network is needed, and this is basically outside Khartoum region. Also, in the Khartoum region, improving the 4G services, it is very much important for us. Also, on the wholesale side or the land station side, we mentioned that there is Africa-1 cable that will land in Sudan. And there is an investment that will be done, and hopefully, also to benefit, of course, Sudan, and to benefit, of course, also to the group. This also is added in the $800 million. And another thing which is related to the spectrum that lately there was an auction in Sudan to get the new spectrum. So this is also included in the $800 million. We believe that it is achievable. It is not a number that we will not be able to achieve. And it's based on the performance of Zain Sudan, such an investment is needed. On the Number Range for Zain Kuwait, it is approximately KWD 24.7 million. We won the first degree. We won now the appellate court, and we expect the cassation to happen soon. It is, I believe, like 60 days from the decision of the appellate court. KWD 24.7 million will be received in cash, similar to what happened to STC, because STC had the same case, and they received, I believe, last year, the cash related to this dispute. Okay?

And at this time, there are no further questions.

Okay. Thank you, everyone. Thank you, Faisal. Please refer to our Investor Relations website for additional updates that we'll have in the next few days, and feel free to contact the IR team for further information. We look forward for your future participation in our Q1 2023 update. Thank you all for joining the call. Have a great day.

This does conclude today's conference. We thank you for your participation.